Platforms: A Business Model for Strategic Growth

June 9, 2018

Major Macroeconomic Shift from Products to Platforms

The greatest economic disruption since the Industrial Revolution is currently taking place due to profound value chain and asset value changes in modern business practices. Physical and digital worlds are merging, creating new forms of interaction between businesses and people.

The traditional organization lifecycle flow — from design and creation to selling and consuming specific products — is evolving in our digital world. While particular stages may be removed or merged, this overall transformation introduces a new instrument called a platform.

In this new business model, the main assets take the form of interactions between producers and consumers. Elaborate algorithms and data management solutions enable an evolved user experience, and an optimized costs structure enables rapid growth for businesses.

What is a Platform?

Platforms are open intermediary interfaces through which suppliers and customers meet; they are multi-facial structures forged by their users and suppliers. Both sides are engaged due to a number of benefits created by the platform ecosystem.

Users are attracted to platforms for many of the following reasons:

Platforms memberships are mostly free-of-charge for consumers.

Modern aggregators are easy to use and offer a very wide range of products and services.

Buyers can communicate with each other, creating peer-to-peer communities.

Prices are lower because of internal competition and reduced operating costs.

Platforms offer seamless logistics and customer care.

Suppliers are driven by the following factors to choose platforms:

Platforms attract many users, so they offer a large market.

This market can be easily accessed, and costs of using a platform are comparatively low.

Using a platform brand and UX enables suppliers to improve their digital image.

Because sellers can build relationships with buyers, platform integrations may replace or significantly enrich their own digital presence.

Platforms also empower entire markets through the following factors:

Network Effect: Two user sides create content and value for each other and for the platform.

Scalability: Freed from infrastructure problems, businesses can make a rapid jump in scale, as well as fast internationalization.

Players of Platform Ecosystem Adoption

Platform business development started with digital-born technology and retail companies (e.g., Amazon, Alphabet, eBay), and now they are dominating the digital economy. Non-technology industry leaders who have realized the power of digital ecosystems are actively developing their platform strategies. Depending on the type of company, there are different strategies in a platform economy:

Asset Light BusinessesAsset light businesses (i.e., don’t own physical assets) like Uber or Airbnb have created their entire business models around platforms. Such companies are pure platform players, and as industry disruptors they totally rely on the power of optimizing ecosystems. Although they primarily drive new platform models, some develop in the direction of middle/heavy asset businesses by investing in tangible assets. For instance, Uber is investing in a driverless fleet of cabs. The majority of modern startups belong to this asset light category (according CB Insights, 70% of unicorns are platform companies).

Mixed BusinessesAmazon and Apple are vivid examples of companies that combine their own goods or services with a platform. They both leverage ecosystems effects while controlling their own product supply chain.

Asset Heavy BusinessesTraditional corporations — especially industry leaders like General Motors or General Electric — have started using the strengths of platforms to build sideline businesses that primarily target the consumers of their core products. For example, in December 2017, GM introduced the first automotive commerce platform for on-demand goods and services reservation. Creating a new consortium model, asset heavy companies often start with bringing their partners/suppliers to a platform in order to drive standardization. Then they involve their customers and distribution channels to get to new verticals. Besides building their own platforms, another option for non-technology enterprises is integration with existing ecosystems.

Advantages and Risks of Platform Integration

To be successful in today’s competitive landscape, enterprises across multiple industries must integrate their mission-critical components with digital ecosystems. They usually take the first step to lower costs and spread risks. In this way, their main business functions are tightly connected to a network of digital partners.

On the one hand, in the near future all companies — regardless of their nature — will have to integrate with third-party platforms to match the standards of customer service, technology maintenance, and other processes of their digital competitors (especially related to client interaction). But on the other hand, relying on online platforms not only means giving up control of product and brand presentation, but it also hands over the gathering and management of increasingly important customer data to the platforms.

However, as digital platforms develop in size and market power, the risks of neglecting such opportunities will become higher than the drawback of not having complete control ovwe the value chain and data. Customers will turn to online platforms as the main point of search, driven by the platforms’ enhanced user experiences, customer care, and broad range of products.

This tendency is not limited to major consumer-facing industries like high-tech, retail, and media. Platforms are also disrupting connected healthcare, heavy industry, education, hospitality, insurance, payments. They are event impacting improbable sectors like politics through online selling platforms, communication systems, social networks, and AI intermediaries.

Therefore, defining a platform ecosystem strategy should be among the core components of corporate planning. From the implementation side (i.e., maximizing positive effects and minimizing risks), we recommend aligning your network strategy with the right choice of platform-enabling technologies, like modular software architecture, IoT, cloud technologies, big data solutions, and AI solutions (depending on whether the company wants to develop a new platform or integrate with existing platforms).

GlobalLogic unites under one roof the technologies needed for platform development, from embedded to cloud, and from to data analytics to UX. An advisory-based approach helps our clients choose the optimal platformization strategy and implement it in the most effective way.